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The Bank of England held interest rates at 4.25% as expected on Thursday but said it was focused on risks from a weaker labour market and from higher energy prices as conflict escalates in the Middle East.
The Monetary Policy Committee voted 6-3 to keep rates on hold. Deputy Governor Dave Ramsden joined Swati Dhingra and Alan Taylor to vote for a quarter-point reduction.
The three policymakers highlighted “a material loosening in labour market conditions” after official figures showed the highest unemployment rate since 2021 and weaker wage growth.
It was a bigger split than forecast in a Reuters poll of economists who had expected a 7-2 vote to leave rates unchanged after the British central bank cut borrowing costs last month for the fourth time since August 2024.
“Interest rates remain on a gradual downward path,” Governor Andrew Bailey said in a statement, although policymakers said in minutes of the meeting that interest rates were not on a pre-set path.
“The world is highly unpredictable. In the UK we are seeing signs of softening in the labour market. We will be looking carefully at the extent to which those signs feed through to consumer price inflation,” Bailey said.
Bailey said in a later video clip that he was not giving a prediction of an August cut.
The central bank said geopolitical tensions as it held its meeting over the past week were not key to June’s decision to hold rates, but would be closely monitored.
“Energy prices had risen owing to an escalation of the conflict in the Middle East. The committee would remain vigilant about these developments and their potential impact on the UK economy,” the BoE said.
Nearly all 60 economists polled by Reuters before the BoE’s June meeting had predicted it would keep Bank Rate on hold at 4.25%, with the next cut likely in August and a further reduction expected in the final three months of this year.
Sterling fell briefly against the U.S. dollar before recovering. Economists said interest rate futures were pricing in a near-80% chance of an August cut, slightly higher than before the decision.
“We think data surprises need to be to the upside from here to prompt a ‘hold’ decision,” HSBC economist Elizabeth Martins said.
The BoE kept its “gradual and careful” guidance on the pace of further rate cuts.
Staff analysis was less pessimistic than in May about the potential impact of U.S. President Donald Trump’s tariffs on the global economy, but said trade uncertainty would still continue to have an impact on the UK economy.
Inflation Risks
Minutes from the June meeting showed that committee members discussed whether Britain had a bigger inflation problem than the United States or euro zone. Britain’s May inflation reading of 3.4% was higher than anywhere else in Western Europe.
“Some of that difference could be accounted for by the greater contribution of regulated prices to UK inflation recently,” policymakers said.
Electricity, gas and water prices caused inflation to jump sharply in April, with an increase to the minimum wage and higher employer payroll taxes adding further upward pressure.
The BoE left its forecast for inflation broadly unchanged for the second half, seeing a peak rate of 3.7% in September and an average of just under 3.5% for the rest of 2025.
In a video clip posted on professional networking site LinkedIn, Bailey said inflation was expected to return to the 2% target but that policymakers would need to see more evidence before deciding on future rate cuts.
The economy is now expected to grow around 0.25% in the second quarter of this year, slightly stronger than in its May forecast, though the bank said the underlying pace was weak.
Pay growth is seen slowing significantly over the rest of this year.
“There appears to be a growing consensus amongst rate setters that the labour market is loosening,” Matt Swannell, chief economic adviser to the EY ITEM Club, said.
Since mid-2024, the BoE has cut interest rates by 1 percentage point, the same as the U.S. Federal Reserve, which held interest rates on Wednesday, but only half as much as the European Central Bank, which has had less persistent inflation.
Markets see just under half a percentage point more easing by the Fed this year and a further quarter-point cut by the ECB.
(Writing by Suban Abdulla; graphics by Sumanta Sen; Editing by Alex Richardson and Catherine Evans)
